Corporate Pension Plans’ Funded Status Dips for First Time Since April

A surge in liabilities from low discount rates dropped aggregate ratios 1.3 percentage points to 79.9%, Wilshire says.

The aggregate funded ratio for US corporate pension plans dipped in July for the first time since the start of the economic recovery. 

Last month, funded status fell by 1.3 percentage points to 79.9% for corporate defined benefit (DB) plans, Wilshire Associates said in a report. That’s the same funded status corporate plans notched March 31 after the coronavirus crashed markets and the lowest level since October 2016. 

A surge in liabilities drove down the funded ratio: Assets in July jumped by 4%, but liabilities climbed higher to 5.6%. A roughly 20 basis point (bp) fall in Treasury yields in July and a 15 basis point drop in corporate bond spreads helped drive up liabilities, according to Wilshire Managing Director Ned McGuire. Discount rates are hovering in the low- to mid-2% range, or the lowest level in more than a decade.

Cumulatively, the aggregate funded ratio has fallen by 7.2 percentage points since the start of the year, when the funded status hovered at 87.1%, as of December 31. Over the past 12 months, funded ratios have tumbled 8.9 percentage points from 88.8% last July. 

Historically low discount rates are also continuing to pressure corporate pension plans despite strong investment gains in the equities market. Since March lows, the S&P 500 is up nearly 49% and has nearly recovered all its losses from the pandemic-induced market rout. Year to date, the index is up 3%. 

The quick recovery has made some investors nervous that enthusiastic markets will crash in the second half of the year. This week, CNBC Mad Money host Jim Cramer even commented, “I can’t take how stupidly bullish this market can be.” 

Other reports from Milliman have found that corporate pension plans had already seen their funded status declining in May. For corporate DB plans, falling discount rates will continue to add pressure to companies looking to de-risk their plans.   

The findings are based on a portfolio asset allocation with 22% in US equities, 17% in non-US equities, 25% in core fixed income, 34% in long-duration fixed income, and 2% in real estate.

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